The Basics of Investing in Stocks

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How Do Stocks Work?

Stocks represent a share of ownership in a publicly traded company. According to a Gallup survey, approximately 62% of U.S. adults own stocks in some form. Whether you invest in individual stocks, mutual funds, or exchange-traded funds (ETFs), understanding how they work is crucial for incorporating them into your investment portfolio.

Types of Stocks

There are various types of stocks, each with its own benefits and drawbacks. Depending on your investment strategy, you may want to focus on certain types.

Common Stock

Common stockholders buy shares through a brokerage account and may benefit from price appreciation and dividends. They may also get voting rights for board of director elections and company policies.

Preferred Stock

Preferred stockholders typically receive a dividend, even if common stockholders do not. They also get priority over common stockholders if the company files for bankruptcy. However, preferred stockholders do not get voting rights.

Stocks by Market Capitalization

Common stocks can be categorized based on the company’s market capitalization:

• Mega-cap stocks: $200 billion or more
• Large-cap stocks: $10 billion to $200 billion
• Mid-cap stocks: $2 billion to $10 billion
• Small-cap stocks: $250 million to $2 billion
• Micro-cap stocks: Under $250 million

Stocks by Strategy

There are different strategies for investing in stocks, including growth, value, and income approaches:

• Growth stocks: Offer above-average returns and are expected to continue growing.
• Value stocks: Typically underpriced stocks that could provide a strong return.
• Income stocks: Pay regular dividends and often have relatively stable prices.

International Stocks

International stocks are issued by companies that operate in other countries. You typically can’t buy individual international stocks on U.S. stock exchanges, but some U.S. banks issue American Depository Receipts for these stocks.

Benefits and Drawbacks of Stocks

Before investing in stocks, it’s important to understand both the potential benefits and risks.

Benefits

• Potential for growth: Stocks can generate positive returns if the company performs well.
• Easy to buy: Fractional shares allow you to invest with as little as $1.
• Fairly liquid: Stocks can be bought and sold anytime the market is open.

Risks

• Short-term volatility: Stocks may experience wild price swings in the short term.
• Gains are taxable: Selling a stock with a positive return is subject to capital gains tax.
• Time to master a strategy: Developing a successful investment strategy can take time.

Stocks vs. Bonds

Stocks and bonds serve different purposes for both investors and the organizations that issue them. While stocks represent ownership in a company, bonds are effectively loans. Here are some key differences:

• Income: Stocks may pay dividends, but bonds typically offer regular interest payments.
• Pricing: Stock prices fluctuate based on the company’s performance, while bond prices fluctuate based on prevailing interest rates.
• Return potential: Stocks generally offer higher long-term returns but with greater volatility, whereas bonds offer lower returns with fewer risks.

How to Buy Stocks

If you’re interested in adding stocks to your investment portfolio, follow these steps:

1. Open a brokerage account: Compare online brokers and open an account.
2. Evaluate your options: Consider stock mutual funds and ETFs for diversification.
3. Decide how much to invest: Spread your money across multiple stocks and funds.
4. Place your order: Use your brokerage account or mobile app to place your order.

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